Output levels in India’s industries appear to be hitting a roadblock amid what the government described in the Union budget as “a general, strong recovery and economic recovery,” reflecting the country’s “strong resilience.” Factory production, as measured by the Industrial Production Index (IIP), fell for the fourth straight month to a 10-month low of 0.4% in December 2021 compared to the same month in 2020. While the Omicron variant was worrying until then was , its impact was limited to contact-intensive service sectors, with no restrictions on manufacturing activity. From nearly 13% year-over-year growth in August 2021, IIP growth has slowed each month — from 4.35% in September to 4% in October to just 4% each month — thanks to a low COVID-19 lockdown hit base 1.3% in November. It’s worth remembering that by September 2020, most of the lockdown restrictions that could have plagued factories had been eased, so perhaps some gaps in the workforce and the shock to confidence and demand were the only hiccups for production managers. Those hiccups were thought to be largely over after the deadly second wave subsided in 2021. If that were indeed the case, industrial production should have expanded more than the monthly average of just 2.5% over the last four months of 2021, especially when festive demand is at play. January’s GST surveys, which reflect activity in December, hit a new record may suggest all is well, but tax revenues are also being boosted by inflation and quarterly filing options for smaller taxpayers . In addition, GST receipts from imported goods have consistently increased faster than receipts from domestic transactions that involve imports of services. What makes the trend even more difficult to decipher is the volatility of the monthly IIP numbers — since August, the composite index has alternated between contracting and expanding each month, even as the year-on-year percentage growth has steadily collapsed.
The 2021-22 economic survey seemed to paint a different landscape, noting that an incipient recovery in private investment is likely to accelerate as corporate earnings and capital raising activities boom. “The expected surge in private consumption will drive capacity utilization, thereby boosting private investment,” it said, citing an RBI survey that signals rising investor optimism and expansion in output in the coming quarters. Economists believe the IIP data suggests the budget bet that public investment will catalyze a consumption- and investment-led recovery is shaky. Manufacturing actually contracted in December, with capital goods (which reflect investment activity) contracting a sharp 4.6% from 2020 levels and remaining below pre-pandemic levels. Consumer discretionary fell for the fourth straight month, while even consumer discretionary fell after a few months of sluggish growth. With high commodity costs restraining producers, consumers still in cautious mode and the threat of a sharp rise in fuel prices following the March 10 election results. That the central bank will remain in a growth accommodative mode as the world shifts gears to tackling inflation shows their concerns about the durability and quality of India’s recovery. The government urgently needs to restart its rosy assessment of the economy and recalibrate its approach so that ‘on paper’ optimism translates into smoking factory chimneys.
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